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LESL Leslie's

Filed: 10 May 21, 4:06pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to         

Commission File Number: 001-39667

 

 

LESLIE’S, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-8397425

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2005 East Indian School Road

Phoenix, AZ

85016

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (602) 366-3999

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

LESL

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of May 7, 2021, the registrant had 187,918,474 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Stockholders’ Deficit

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

26

 

 

 

Signatures

27

 

 

 

i


Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Our actual results could differ materially from those indicated in these forward-looking statements for a variety of reasons, including, among others:

 

our ability to execute on our growth strategies;

 

our ability to maintain favorable relationships with suppliers and manufacturers;

 

competition from mass merchants and specialty retailers;

 

impacts on our business from the sensitivity of our business to weather conditions, changes in the economy, and the housing market;

 

our ability to implement technology initiatives that deliver the anticipated benefits, without disrupting our operations;

 

regulatory changes and development affecting our current and future products;

 

our ability to obtain additional capital to finance operations;

 

commodity price inflation and deflation;

 

impacts on our business from the COVID-19 pandemic; and

 

other risks and uncertainties, including those listed in the section titled “Risk Factors” in our filings with the United States Securities and Exchange Commission

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended October 3, 2020, Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended January 2, 2021, Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q are based on events or circumstances as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

1


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LESLIE’S, INC.

Condensed Consolidated Balance Sheets

(Amounts in Thousands, Except Share and Per Share Amounts)

 

 

 

April 3, 2021

 

 

October 3, 2020

 

 

March 28, 2020

 

Assets

 

(Unaudited)

 

 

(Audited)

 

 

(Unaudited)

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,328

 

 

$

157,072

 

 

$

11,934

 

Accounts and other receivables, net

 

 

41,733

 

 

 

31,481

 

 

 

30,924

 

Inventories

 

 

277,860

 

 

 

148,966

 

 

 

244,662

 

Prepaid expenses and other current assets

 

 

58,331

 

 

 

34,614

 

 

 

41,609

 

Total current assets

 

 

468,252

 

 

 

372,133

 

 

 

329,129

 

Property and equipment, net

 

 

63,632

 

 

 

66,391

 

 

 

72,169

 

Operating lease right-of-use assets

 

 

181,581

 

 

 

177,655

 

 

 

200,746

 

Goodwill and other intangibles, net

 

 

127,851

 

 

 

121,186

 

 

 

122,213

 

Deferred tax assets

 

 

15,293

 

 

 

6,583

 

 

 

 

Other assets

 

 

2,302

 

 

 

2,490

 

 

 

1,270

 

Total assets

 

$

858,911

 

 

$

746,438

 

 

$

725,527

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

181,524

 

 

$

92,372

 

 

$

143,197

 

Accrued expenses

 

 

82,338

 

 

 

101,167

 

 

 

67,091

 

Operating lease liabilities

 

 

55,395

 

 

 

54,459

 

 

 

59,721

 

Income taxes payable

 

 

 

 

 

1,857

 

 

 

 

Current portion of long-term debt

 

 

8,100

 

 

 

8,341

 

 

 

8,341

 

Total current liabilities

 

 

327,357

 

 

 

258,196

 

 

 

278,350

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

4,273

 

Operating lease liabilities, noncurrent

 

 

130,496

 

 

 

130,234

 

 

 

151,059

 

Long-term debt, net

 

 

789,339

 

 

 

1,179,550

 

 

 

1,234,003

 

Other long-term liabilities

 

 

2,729

 

 

 

5,457

 

 

 

5

 

Total liabilities

 

 

1,249,921

 

 

 

1,573,437

 

 

 

1,667,690

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 1,000,000,000 shares authorized and

   186,884,621 issued and outstanding as of April 3, 2021 and

   156,500,000 shares authorized, issued and outstanding as of

   October 3, 2020 and March 28, 2020, respectively.

 

 

187

 

 

 

157

 

 

 

157

 

Additional paid in capital (deficit)

 

 

194,605

 

 

 

(278,063

)

 

 

(278,653

)

Retained deficit

 

 

(585,802

)

 

 

(549,093

)

 

 

(663,667

)

Total stockholders’ deficit

 

 

(391,010

)

 

 

(826,999

)

 

 

(942,163

)

Total liabilities and stockholders’ deficit

 

$

858,911

 

 

$

746,438

 

 

$

725,527

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

LESLIE’S, INC.

Condensed Consolidated Statements of Operations

(Amounts in Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

 

April 3, 2021

 

 

March 28, 2020

 

Sales

 

$

192,441

 

 

$

126,377

 

 

$

337,447

 

 

$

249,355

 

Cost of merchandise and services sold

 

 

120,758

 

 

 

86,464

 

 

 

214,049

 

 

 

168,364

 

Gross profit

 

 

71,683

 

 

 

39,913

 

 

 

123,398

 

 

 

80,991

 

Selling, general and administrative expenses

 

 

70,374

 

 

 

56,048

 

 

 

147,863

 

 

 

115,769

 

Operating income (loss)

 

 

1,309

 

 

 

(16,135

)

 

 

(24,465

)

 

 

(34,778

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8,126

 

 

 

22,709

 

 

 

19,642

 

 

 

45,126

 

Loss on debt extinguishment

 

 

1,888

 

 

 

 

 

 

9,169

 

 

 

 

Other expenses, net

 

 

1,057

 

 

 

187

 

 

 

1,057

 

 

 

324

 

Total other expense

 

 

11,071

 

 

 

22,896

 

 

 

29,868

 

 

 

45,450

 

Loss before taxes

 

 

(9,762

)

 

 

(39,031

)

 

 

(54,333

)

 

 

(80,228

)

Income tax benefit

 

 

(3,310

)

 

 

(9,205

)

 

 

(17,624

)

 

 

(24,215

)

Net loss

 

$

(6,452

)

 

$

(29,826

)

 

$

(36,709

)

 

$

(56,013

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.03

)

 

$

(0.19

)

 

$

(0.20

)

 

$

(0.36

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

186,810

 

 

 

156,500

 

 

 

181,900

 

 

 

156,500

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

 

LESLIE’S, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(Amounts in Thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid in

Capital

 

 

Retained

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Deficit

 

 

Deficit

 

Balance, December 28, 2019

 

 

156,500

 

 

$

157

 

 

$

(279,251

)

 

$

(633,841

)

 

$

(912,935

)

Equity-based compensation

 

 

 

 

 

 

 

 

598

 

 

 

 

 

 

598

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(29,826

)

 

 

(29,826

)

Balance, March 28, 2020

 

 

156,500

 

 

$

157

 

 

$

(278,653

)

 

$

(663,667

)

 

$

(942,163

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 2, 2021

 

 

186,619

 

 

$

187

 

 

$

192,753

 

 

$

(579,350

)

 

$

(386,410

)

Issuance of shares under stock incentive plans

 

 

266

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon initial public offering,

   net of offering costs

 

 

 

 

 

 

 

 

(99

)

��

 

 

 

 

(99

)

Equity-based compensation

 

 

 

 

 

 

 

 

1,951

 

 

 

 

 

 

1,951

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,452

)

 

 

(6,452

)

Balance, April 3, 2021

 

 

186,885

 

 

$

187

 

 

$

194,605

 

 

$

(585,802

)

 

$

(391,010

)

 

 

 

Common Stock

 

 

Additional

Paid in

Capital

 

 

Retained

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

(Deficit)

 

 

Deficit

 

 

Deficit

 

Balance, September 28, 2019

 

 

156,500

 

 

$

157

 

 

$

(279,848

)

 

$

(607,666

)

 

$

(887,357

)

Impact of adoption of new accounting pronouncements

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

12

 

Equity-based compensation

 

 

 

 

 

 

 

 

1,195

 

 

 

 

 

 

1,195

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(56,013

)

 

 

(56,013

)

Balance, March 28, 2020

 

 

156,500

 

 

$

157

 

 

$

(278,653

)

 

$

(663,667

)

 

$

(942,163

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 3, 2020

 

 

156,500

 

 

$

157

 

 

$

(278,063

)

 

$

(549,093

)

 

$

(826,999

)

Issuance of shares under stock incentive plans

 

 

385

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon initial public offering,

   net of offering costs

 

 

30,000

 

 

 

30

 

 

 

458,557

 

 

 

 

 

 

458,587

 

Equity-based compensation

 

 

 

 

 

 

 

 

14,111

 

 

 

 

 

 

14,111

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(36,709

)

 

 

(36,709

)

Balance, April 3, 2021

 

 

186,885

 

 

$

187

 

 

$

194,605

 

 

$

(585,802

)

 

$

(391,010

)

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

4


Table of Contents

LESLIE’S, INC.

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(36,709

)

 

$

(56,013

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,858

 

 

 

14,088

 

Equity-based compensation

 

 

14,111

 

 

 

1,195

 

Amortization of deferred financing costs and debt discounts

 

 

1,134

 

 

 

1,685

 

Provision for doubtful accounts

 

 

64

 

 

 

149

 

Deferred income taxes

 

 

(8,711

)

 

 

3,033

 

(Gain) loss on disposition of assets

 

 

(1,753

)

 

 

470

 

Loss on debt extinguishment

 

 

9,169

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and other receivables

 

 

(10,316

)

 

 

(11,046

)

Inventories

 

 

(127,814

)

 

 

(93,933

)

Prepaid expenses and other current assets

 

 

(23,473

)

 

 

(20,063

)

Other assets

 

 

228

 

 

 

150

 

Accounts payable and accrued expenses

 

 

64,332

 

 

 

50,829

 

Income taxes payable

 

 

(1,857

)

 

 

(6,713

)

Operating lease assets and liabilities, net

 

 

(2,728

)

 

 

10,034

 

Net cash used in operating activities

 

 

(111,465

)

 

 

(106,135

)

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(9,490

)

 

 

(12,478

)

Acquisitions, net of cash acquired

 

 

(6,040

)

 

 

(6,188

)

Proceeds from disposition of fixed assets

 

 

2,404

 

 

 

6

 

Net cash used in investing activities

 

 

(13,126

)

 

 

(18,660

)

Financing Activities

 

 

 

 

 

 

 

 

Borrowings on revolving commitment

 

 

 

 

 

181,750

 

Payments on revolving commitment

 

 

 

 

 

(131,750

)

Repayment of long term debt

 

 

(392,085

)

 

 

(4,170

)

Issuance of long term debt

 

 

907

 

 

 

 

Payment of deferred financing costs

 

 

(9,562

)

 

 

 

Proceeds from issuance of common stock upon initial public offering, net

 

 

458,587

 

 

 

 

Net cash provided by financing activities

 

 

57,847

 

 

 

45,830

 

Net decrease in cash and cash equivalents

 

 

(66,744

)

 

 

(78,965

)

Cash and cash equivalents, beginning of period

 

 

157,072

 

 

 

90,899

 

Cash and cash equivalents, end of period

 

$

90,328

 

 

$

11,934

 

Supplemental Disclosure of Cash Payments for:

 

 

 

 

 

 

 

 

Interest

 

$

27,081

 

 

$

44,762

 

Income taxes

 

 

3,078

 

 

 

2,882

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

 

LESLIE’S, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business and Operations

Leslie’s, Inc. (“Leslie’s,” “we,” “our,” “us,” “its,” or the “Company”) is the leading direct-to-consumer pool and spa care brand. We market and sell pool and spa supplies and related products and services, which primarily consist of maintenance items such as chemicals, equipment and parts, cleaning accessories, as well as safety, recreational, and fitness-related products. We currently market our products through 940 company-operated locations in 38 states and e-commerce websites.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

We prepared the accompanying interim condensed consolidated financial statements following United States generally accepted accounting principles (“GAAP”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The condensed consolidated financial statements include the accounts of Leslie’s, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements and the related notes should be read in conjunction with the audited condensed consolidated financial statements and notes for the years ended October 3, 2020 and September 28, 2019.

Initial and Subsequent Public Offering

In November 2020, the Company completed an initial public offering (“IPO”) of 30.0 million shares of common stock at a public offering price of $17.00 per share for net proceeds of $458.7 million, after deducting underwriting discounts and commissions of $45.0 million and offering costs of $6.3 million. The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters’ option to purchase additional shares. The Company used the net proceeds from the IPO to repay the entire outstanding amount related to its $390.0 million Senior Unsecured Notes. The remaining proceeds will be used for working capital and general corporate purposes.

In February 2021, certain of the Company’s stockholders, completed a subsequent public offering of 29.0 million shares of common stock, with a 30-day option for the underwriters to purchase up to 4.4 million additional shares of common stock, at a public offering price of $26.00 per share for net proceeds of $731.4 million, after deducting underwriting discounts and commissions of $22.6 million.  All proceeds from the sale of shares of common stock in this offering were received by the selling stockholders.

Stock Split

All share and per share information included in the accompanying condensed consolidated financial statements has been adjusted to reflect a 156,500-for-1 stock split which was effected on October 23, 2020. The par value of the common stock was not adjusted as the result of the stock split.

Fiscal Periods

We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to fiscal year 2021 refer to the fiscal year ending October 2, 2021, which contains 52 weeks, and references to fiscal year 2020 refer to the fiscal year ended October 3, 2020, which contained 53 weeks. References to the three months ended April 3, 2021 and the three months ended March 28, 2020 refer to the 13 weeks ended April 3, 2021 and March 28, 2020, respectively. References to the six months ended April 3, 2021 and the six months ended March 28, 2020 refer to the 26 weeks ended April 3, 2021 and March 28, 2020, respectively.

Use of Estimates

To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor programs, income taxes, self-insurance, and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.

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Fair Value Measurements

As of April 3, 2021 and October 3, 2020, we held 0 assets that were required to be measured at fair value on a recurring basis.

Fair Value of Financial Instruments

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period.

The fair value of the Term Loan due in 2028 (see Note 7) was determined to be $804.7 million as of April 3, 2021. These fair value estimates, determined to be Level 2, are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

The fair value of the interest rate cap agreements (see Note 7) was determined to be Level 2 and is included in other assets on the condensed consolidated balance sheets as of October 3, 2020. Our interest rate cap agreements expired in March 2021; consequently, we had 0 interest rate cap agreements as of April 3, 2021. Changes in fair value of the interest rate cap are recorded in other expenses, net on our condensed consolidated statements of operations.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.

There were 0 transfers between levels in the fair value hierarchy during the three and six months ended April 3, 2021 and March 28, 2020, respectively.

Seasonality

Our business is highly seasonal. In general, sales and earnings are highest during our fiscal third and fourth quarters, which include April through September and represent the peak months of swimming pool use. Sales are substantially lower during our fiscal first and second quarters.

Prior Period Reclassifications

Reclassifications of certain immaterial prior period amounts have been made to conform to current period presentation.

Note 3—Business Combinations

The following acquisitions did not have a material impact on our financial position or results of operations. Our condensed consolidated financial statements include the results of operations of these acquisitions from the date of acquisition. The total purchase consideration was allocated to the assets acquired and the liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The goodwill resulting from these acquisitions are deductible for income tax purposes.

Fiscal 2021 Acquisition

In March 2021, we acquired the assets of a retailer of supplies and services for hot tubs, swim spas and fireplaces. The acquisition included 4 store locations in the Denver, Colorado area and expanded our physical presence to 38 states. Our estimates and assumptions are subject to change as we gather additional information throughout the measurement period, which is up to 12 months after the acquisition date, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified.

Fiscal 2020 Acquisition

In October 2019, we acquired the assets of a retailer of supplies and services for hot tubs, swim spas and saunas. The acquisition included 6 locations in the Pacific Northwest and expanded our physical presence to 37 states. The purchase accounting for this acquisition is complete.

Note 4 —Goodwill and Other Intangibles, Net

Goodwill

The carrying amounts of goodwill are as follows (in thousands):

 

 

Carrying Value

 

Balance, April 3, 2021

 

$

97,692

 

Balance, October 3, 2020

 

 

93,295

 

Balance, March 28, 2020

 

 

92,821

 

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Other Intangible Assets

Other intangible assets consisted of the following as of April 3, 2021 (in thousands, except weighted average remaining useful life):

 

 

 

Weighted

Average

Remaining

Useful Life

(in Years)

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Trade name and trademarks (finite life)

 

 

1.6

 

 

$

5,540

 

 

$

(5,195

)

 

$

345

 

Trade name and trademarks (indefinite life)

 

Indefinite

 

 

 

18,550

 

 

 

 

 

 

18,550

 

Non-compete agreements

 

 

4.4

 

 

 

9,833

 

 

 

(7,014

)

 

 

2,819

 

Consumer relationships

 

 

3.2

 

 

 

18,500

 

 

 

(10,853

)

 

 

7,647

 

Internally developed software

 

 

2.0

 

 

 

4,000

 

 

 

(3,530

)

 

 

470

 

Other

 

 

0.7

 

 

 

1,000

 

 

 

(975

)

 

 

25

 

Total

 

 

 

 

 

$

57,423

 

 

$

(27,567

)

 

$

29,856

 

 

Other intangible assets are as follows as of October 3, 2020 (in thousands, except weighted average remaining useful life):

 

 

 

Weighted

Average

Remaining

Useful Life

(in Years)

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Trade name and trademarks (finite life)

 

 

2.6

 

 

$

5,540

 

 

$

(5,139

)

 

$

401

 

Trade name and trademarks (indefinite life)

 

Indefinite

 

 

 

17,750

 

 

 

 

 

 

17,750

 

Non-compete agreements

 

 

4.9

 

 

 

8,633

 

 

 

(6,872

)

 

 

1,761

 

Consumer relationships

 

 

3.8

 

 

 

17,200

 

 

 

(10,118

)

 

 

7,082

 

Internally developed software

 

 

2.9

 

 

 

4,000

 

 

 

(3,434

)

 

 

566

 

Other

 

 

1.6

 

 

 

1,000

 

 

 

(958

)

 

 

42

 

Total

 

 

 

 

 

$

54,123

 

 

$

(26,521

)

 

$

27,602

 

 

Other intangible assets are as follows as of March 28, 2020 (in thousands, except weighted average remaining useful life):

 

 

 

Weighted

Average

Remaining

Useful Life

(in Years)

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Trade name and trademarks (finite life)

 

 

2.3

 

 

$

5,540

 

 

$

(5,082

)

 

$

458

 

Trade name and trademarks (indefinite life)

 

Indefinite

 

 

 

17,750

 

 

 

 

 

 

17,750

 

Non-compete agreements

 

 

4.2

 

 

 

8,633

 

 

 

(6,364

)

 

 

2,269

 

Consumer relationships

 

 

3.5

 

 

 

17,200

 

 

 

(9,340

)

 

 

7,860

 

Internally developed software

 

 

2.5

 

 

 

4,000

 

 

 

(3,307

)

 

 

693

 

Other

 

 

1.3

 

 

 

1,000

 

 

 

(942

)

 

 

58

 

Total

 

 

 

 

 

$

54,123

 

 

$

(25,035

)

 

$

29,088

 

 

Amortization expense for the three months ended April 3, 2021 and March 28, 2020 was $0.5 million. Amortization expense for the six months ended April 3, 2021 and March 28, 2020 was $1.0 million and $1.1 million, respectively. NaN impairment of goodwill or other intangible assets was recorded during the three and six months ended April 3, 2021 and March 28, 2020, respectively.

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The following table summarizes the estimated future amortization expense related to finite-lived intangible assets on our balance sheet as of April 3, 2021 (in thousands):

 

 

Amount

 

Remainder of Fiscal 2021

 

$

1,197

 

2022

 

 

2,266

 

2023

 

 

2,033

 

2024

 

 

1,395

 

2025

 

 

1,298

 

Thereafter

 

 

3,918

 

Total

 

$

12,107

 

 

Intangible assets also include costs associated with acquiring mailing lists for our proprietary database. As of April 3, 2021, October 3, 2020, and March 28, 2020, gross amounts capitalized on the condensed consolidated balance sheets for mailing lists were $1.6 million with a net carrying value of $0.3 million.

Note 5—Inventories

Inventory consisted of the following (in thousands):

 

 

April 3, 2021

 

 

October 3, 2020

 

 

March 28, 2020

 

Raw materials

 

$

4,274

 

 

$

1,967

 

 

$

2,047

 

Finished goods

 

 

273,586

 

 

 

146,999

 

 

 

242,615

 

Inventories

 

$

277,860

 

 

$

148,966

 

 

$

244,662

 

 

Note 6—Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

April 3, 2021

 

 

October 3, 2020

 

 

March 28, 2020

 

Accrued payroll and employee benefits

 

$

23,030

 

 

$

32,420

 

 

$

10,120

 

Occupancy expenses

 

 

1,817

 

 

 

3,573

 

 

 

12,145

 

Interest

 

 

524

 

 

 

9,377

 

 

 

16,283

 

Sales taxes

 

 

11,902

 

 

 

11,164

 

 

 

7,685

 

Self-insurance reserves

 

 

5,081

 

 

 

6,518

 

 

 

5,822

 

Customer deposits

 

 

17,884

 

 

 

13,286

 

 

 

3,980

 

All other current liabilities

 

 

22,100

 

 

 

24,829

 

 

 

11,056

 

Total

 

$

82,338

 

 

$

101,167

 

 

$

67,091

 

 

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Note 7—Long-Term Debt

Our debt obligations consisted of the following (in thousands, except interest rates):

 

 

 

Effective

Interest Rate (1)

 

 

April 3, 2021

 

 

October 3, 2020

 

 

March 28, 2020

 

Term Loan—due on March 9, 2028

 

 

3.25

%

(2)

$

810,000

 

 

$

811,178

 

 

$

817,434

 

Senior Unsecured Notes

 

 

 

 

 

 

 

 

 

390,000

 

 

 

390,000

 

ABL Credit Facility

 

 

2.50

%

(3)

 

 

 

 

 

 

 

50,000

 

Total long-term debt

 

 

 

 

 

 

810,000

 

 

 

1,201,178

 

 

 

1,257,434

 

Less: current portion of long-term debt

 

 

 

 

 

 

(8,100

)

 

 

(8,341

)

 

 

(8,341

)

Less: unamortized discount

 

 

 

 

 

 

(3,519

)

 

 

(9,348

)

 

 

(10,510

)

Less: deferred financing charges

 

 

 

 

 

 

(9,042

)

 

 

(3,939

)

 

 

(4,580

)

Long-term debt, net

 

 

 

 

 

$

789,339

 

 

$

1,179,550

 

 

$

1,234,003

 

 

(1)

Effective interest rates as of April 3, 2021.

(2)

Carries interest at a specified margin over LIBOR of 2.75% with a minimum LIBOR of 0.50%.

(3)

Carries interest at a specific margin between 0.75% and 1.00% with respect to Base Rate loans and between 1.75% and 2.00% with respect to Eurodollar Rate loans with a minimum LIBOR of 0.75%.

Term Loan—In March 2021, we entered into an amended and restated term loan credit agreement (the “Term Loan”). The Term Loan provides for an $810.0 million secured term loan facility, decreased pricing by 75 basis points and extended the maturity date to March 9, 2028. The other material terms of the Term Loan prior to the amendment remained substantially unchanged. In addition, as a result of the Term Loan, during the three months ended April 3, 2021, we recognized a $1.9 million loss on early debt extinguishment related to the prepayment of the underlying loan tranches prepaid in connection with the amended Term Loan.

Borrowings under the Term Loan have an initial applicable rate, at our option of, (i) 2.75% for loans that are LIBOR loans and (ii) 1.75% of loans that are ABR loans. The applicable rate of the Term Loan is based on our first lien leverage ratio as follows: (a) if the first lien leverage ratio is greater than 2.75 to 1.00, the applicable rate will be 2.75% for LIBOR loans and 1.75% for ABR loans and (b) the first lien leverage ratio is less than or equal to 2.75 to 1.00, the applicable rate will be 2.50% for LIBOR loans and 1.50% for ABR loans. For LIBOR loans, the loans will bear interest at the adjusted LIBOR rate plus the applicable rate, where the adjusted LIBOR rate will not be less than 0.50%.

Substantially all of our assets are pledged as collateral to secure our indebtedness. The Term Loan does not require us to comply with any financial covenants. The Term Loan contains customary events of default and no event of default had occurred under the Term Loan as of April 3, 2021 or October 3, 2020.

ABL Credit Facility—In August 2020, we entered into an agreement to amend our ABL Credit Facility to extend the final maturity to August 13, 2025 and increase our borrowing capacity to $200.0 million, subject to certain restrictions. We are obligated to pay the lender a commitment fee of 0.375% per annum, payable quarterly in arrears. We are also obligated to pay a commission on all outstanding letters of credit as well as customary administrative, issuance, fronting, amendment, payment, and negotiation fees. As of April 3, 2021 and October 3, 2020, 0 amounts were outstanding on the ABL Credit Facility. The amount available was reduced by $9.2 million of existing standby letters of credit as of April 3, 2021.

Substantially all of our assets are pledged as collateral to secure our indebtedness The ABL Credit Facility does not require us to comply with any financial covenants. The ABL Credit Facility contains customary events of default, including default upon the nonpayment of principal, interest, fees or other amounts, or the occurrence of a change of control. No event of default had occurred under the ABL Credit Facility as of April 3, 2021 and October 3, 2020.

Senior Unsecured Notes—The Senior Unsecured Notes principal of $390.0 million was paid in full on November 3, 2020 resulting in a loss on debt extinguishment of $7.3 million for the six months ended April 3, 2021. The Senior Unsecured Notes were guaranteed on a senior basis by us and all our present and future domestic wholly owned subsidiaries. Interest-only payments on the Senior Unsecured Notes were payable quarterly on January 10, April 10, July 10, and October 10 of each year. We incurred interest of 8.50% plus LIBOR, subject to a minimum rate of 1.00%, on the Senior Unsecured Notes. The Senior Unsecured Notes had restrictive covenants that limited the ability to, among other things, incur or guarantee additional indebtedness or issue preferred stock; pay dividends and make other restricted payments; incur restrictions on the payment of dividends or other distributions; create or incur certain liens; make certain investments; transfer or sell assets; engage in transactions with affiliates; and merge or consolidate with other companies or transfer all or substantially all of our assets.

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Interest Rate Cap Agreements

In March 2017, we entered into interest rate cap agreements in order to manage the variability of cash flows related to a portion of our floating rate indebtedness. Pursuant to the agreements, we capped LIBOR at 3.00% with respect to the aggregate notional amount of $750.0 million. In March 2021, our interest rate cap agreements expired.

The fair value of our interest rate cap agreements were 0 as of October 3, 2020. We did 0t recognize any gain or loss on our interest rate cap agreements during the three and six months ended April 3, 2021 and March 28, 2020, respectively.

Future Debt Maturities

The following table summarizes the debt maturities and scheduled principal repayments of our indebtedness as of April 3, 2021 (in thousands):

 

Amount

 

Remainder of Fiscal 2021

 

$

4,050

 

2022

 

 

8,100

 

2023

 

 

8,100

 

2024

 

 

6,075

 

2025

 

 

10,125

 

Thereafter

 

 

773,550

 

Total

 

$

810,000

 

 

Note 8—Leases

Lessee Arrangements

Operating Leases

We lease certain store, office, distribution, and manufacturing facilities under operating leases that expire at various dates through October 2030. We are obligated to make cash payments in connection with various lease obligations and purchase commitments. All of these obligations require cash payments to be made by us over varying periods of time. Certain leases are renewable at our option for periods of five to ten years. Certain of these arrangements are cancelable on short notice and others require payments upon early termination.

The following table summarizes the future annual minimum lease payments as of April 3, 2021 (in thousands):

  

 

Amount

 

Remainder of Fiscal 2021

 

$

34,560

 

2022

 

 

61,431

 

2023

 

 

49,272

 

2024

 

 

36,334

 

2025

 

 

22,248

 

Thereafter

 

 

17,224

 

Total

 

$

221,069

 

Less: amount of lease payments representing imputed interest

 

 

35,178

 

Present value of future minimum lease payments

 

 

185,891

 

Less: current obligations under leases

 

 

55,395

 

Long-Term lease obligations

 

$

130,496

 

 

Operating lease expense totaled $16.3 million and $16.1 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Operating lease expense totaled $33.3 million and $31.9 million for the six months ended April 3, 2021 and March 28, 2020, respectively.

Note 9 —Income Taxes

Our effective income tax rate was 31.8% for the six months ended April 3, 2021, compared to 30.7% for the six months ended March 28, 2020. The difference between the statutory rate and our effective rate for the six months ended April 3, 2021 and March 28, 2020 was primarily attributed to a reduction in the valuation allowance for our interest limitation carryforward during the period. Our effective income tax rate can fluctuate due to factors including valuation allowances, changes in tax law, federal and state audits and the impact of discrete items.

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Note 10—Commitments & Contingencies

Contingencies

We are defendants in lawsuits or potential claims encountered in the normal course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. We do not expect that the resolutions of any of these matters will have a material effect on our condensed consolidated financial position or results of operations. We did not record any material loss contingencies as of April 3, 2021, October 3, 2020, and March 28, 2020.

Our workers’ compensation insurance program, general liability insurance program, and employee group medical plan have self-insurance retention features of up to $0.4 million per event as of April 3, 2021 and October 3, 2020 respectively. We had standby letters of credit outstanding in the amounts of $9.2 million and $11.6 million as of April 3, 2021 and October 3, 2020, respectively, for the purpose of securing such obligations under our workers’ compensation self-insurance programs.

Purchase Commitments

In addition to our lease obligations, we maintain future purchase commitments related to inventory and operational requirements.

The following table summarizes the future minimum purchase commitments as of April 3, 2021 (in thousands):

 

 

Amount

 

Remainder of Fiscal 2021

 

$

77,607

 

2022

 

 

87,389

 

2023

 

 

84,731

 

2024

 

 

68,698

 

2025

 

 

48,446

 

Thereafter

 

 

7,687

 

Total

 

$

374,558

 

 

Note 11—Related Party Transactions

In February 2017, we entered into a management services agreement with our private equity sponsors in connection with our acquisition in February 2017. The management services agreement provides that we will pay an annual fee for them to provide management and advisory services to us and our affiliates, including general management consulting services, support and analysis with respect to financing alternatives and strategic planning functions. The management services agreement terminated in October 2020 in connection with the completion of our initial public offering. During the three months ended March 28, 2020, we paid or accrued management fees in the amount of $0.6 million. During the six months ended April 3, 2021 and March 28, 2020, we paid or accrued management fees in the amount of $0.4 million and $1.9 million, respectively.

Note 12—Net Loss Per Share

The following is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

 

April 3, 2021

 

 

March 28, 2020

 

Weighted average common shares outstanding, used for basic computation

 

 

186,810

 

 

 

156,500

 

 

 

181,900

 

 

 

156,500

 

Plus: Incremental shares of potentially dilutive securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average number of common and dilutive potential common shares outstanding

 

 

186,810

 

 

 

156,500

 

 

 

181,900

 

 

 

156,500

 

Stock options and restricted stock units not included in the computation of diluted net loss per share were 4.8 million and 5.7 million, respectively, for the three months ended April 3, 2021 because their inclusion would have been anti-dilutive. Stock options and restricted stock units not included in the computation of diluted net loss per share were 4.7 million and 5.8 million, respectively, for the six months ended April 3, 2021 because their inclusion would have been anti-dilutive. NaN potentially dilutive securities were outstanding during the three and six months ended March 28, 2020.

 


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Note 13—Subsequent Events

On April 12, 2021, we entered into Amendment No. 5 to our $200.0 million ABL Credit Facility (the “Amendment”). The Amendment (i) decreased the applicable margin on the Base Rate loans to a range of 0.25% to 0.75% from 0.75% to 1.00%, (ii) decreased the applicable margin on the Eurodollar Rate loans to a range of 1.25% to 1.75% from 1.75% to 2.00%, (iii) changed the LIBOR floor to 0% from 0.75%, and (iv) decreased our commitment fee rate to 0.25% from 0.375%. The other terms of the ABL Credit Facility prior to the amendment thereof remain substantially unchanged.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended October 3, 2020, Part II, Item 1A, “Risk Factors” of our Quarterly Report on From 10-Q for the quarter ended January 2, 2021, Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q, or other sections of this Quarterly Report on Form 10-Q.

We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to fiscal year 2021 refer to the fiscal year ending October 2, 2021, which contains 52 weeks. References to fiscal year 2020 refer to the fiscal year ended October 3, 2020, which contained 53 weeks.  

Our Company

We are the largest and most trusted direct-to-consumer brand in the $11 billion United States pool and spa care industry, serving residential, professional, and commercial consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 940 branded locations and a robust digital platform. We offer an extensive assortment of professional-grade products, the majority of which are exclusive to Leslie’s, as well as certified installation and repair services, all of which are essential to the ongoing maintenance of pools and spas. Our dedicated team of associates, pool and spa care experts, and experienced service technicians are passionate about empowering our consumers with the knowledge, products, and solutions necessary to confidently maintain and enjoy their pools and spas. The considerable scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States.

We operate primarily in the pool and spa aftermarket industry which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 57 consecutive years of sales growth. Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential and commercial consumers. Consumers receive the benefit of extended vendor warranties when purchasing product through our locations or when our certified in-field technicians install or repair equipment on-site. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value. Our water treatment expertise is powered by data and intelligence accumulated from the millions of water tests we have performed over our history, positioning us as the most trusted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including the Great Recession and the COVID-19 pandemic.

We have a legacy of leadership and disruptive innovation. Since our founding in 1963, we have been the leading innovator in our category and have provided our consumers with the most advanced pool and spa care available. As we have scaled, we have leveraged our competitive advantages to strategically reinvest in our business and intellectual property to develop new value-added capabilities. Over the course of our history, we have pioneered complimentary in-store water testing, offered complimentary in-store equipment repair services, introduced the industry’s first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us.

Key Factors and Measures We Use to Evaluate Our Business

We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are sales, gross profit and gross margin, selling, general and administrative expenses, and operating income. The key non-GAAP measures we use are comparable sales, comparable sales growth, Adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share.

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Sales

We offer a broad range of products that consists of regularly purchased, non-discretionary pool and spa maintenance items such as chemicals, equipment, cleaning accessories and parts, as well as installation and repair services for pool and spa equipment. Our offering of proprietary, owned and third-party brands across diverse product categories drives sales growth by attracting new consumers and encouraging repeat visits from our existing consumers. Revenue from merchandise sales at retail locations is recognized at the point of sale, revenue from services are recognized when the services are rendered and revenue from e-commerce merchandise sales is generally recognized upon shipment of the merchandise. Revenue is recorded net of related discounts and sales tax. Payment from retail customers is generally at the point of sale and payment terms for commercial customers are based on the Company’s credit requirements and generally have terms of less than 60 days. When we receive payment from a consumer before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue or as a customer deposit until the sale or service is complete. Sales are impacted by product mix and availability, as well as promotional and competitive activities and the spending habits of our consumers. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets.

Comparable Sales and Comparable Sales Growth

We measure comparable sales growth as the increase or decrease in sales recorded by the comparable base in any reporting period, compared to sales recorded by the comparable base in the prior reporting period. The comparable base includes sales through our locations and through our e-commerce websites and third-party marketplaces. Comparable sales is a key measure used by management and our board of directors to assess our financial performance.

We consider a new or acquired location comparable in the first full month after it has completed 52 weeks of sales. Closed locations become non-comparable during their last partial month of operation. Locations that are relocated are considered comparable at the time the relocation is complete. Comparable sales are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies.

The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location build-outs, fixtures, and equipment, which we amortize over time as well as cash required for inventory.

We operated 940 and 932 retail locations in 38 and 37 states across the United States as of April 3, 2021 and March 28, 2020, respectively. We own 27 locations and lease the remainder of our locations. Our initial lease terms are typically five years with options to renew for multiple successive five-year periods. We evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, our existing locations, availability and cost of real estate, and distribution and operating costs of our locations. We review performance of our locations on a regular basis and evaluate opportunities to strategically close locations to improve our profitability. Our limited investment costs in individual locations and our ability to transfer sales to our extensive network of remaining locations and e-commerce websites allows us to improve profitability as a result of any strategic closures.

Gross Profit and Gross Margin

Gross profit is equal to our sales less our cost of merchandise and services sold. Cost of merchandise and services sold reflects the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor, costs to provide services, including labor and materials, as well as distribution and occupancy costs. The direct cost of purchased merchandise includes vendor rebates, which are generally treated as a reduction of merchandise costs. We recognize such vendor rebates at the time the obligations to purchase products or perform services have been completed, and the related inventory has been sold. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillment centers used to ship merchandise to our e-commerce consumers. Occupancy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations. These costs are significant and are expected to continue to increase as our company grows.

Gross margin is gross profit as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.

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Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses (“SG&A”) include selling and operating expenses at our retail locations and corporate-level general and administrative expenses. Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, supplies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and field support functions, marketing and advertising, insurance, utilities, occupancy costs related to our corporate office facilities, professional services, and depreciation and amortization for all assets, except those related to our retail locations and distribution operations, which are included in cost of merchandise and services sold. Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations, but will be expected to increase over time to support the needs of our growing company. The components of our SG&A may not be comparable to the components of similar measures of other companies.

Operating Income

Operating income is gross profit less SG&A. Operating income excludes interest expense, loss on debt extinguishment, income tax expense, and other expenses, net. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

Adjusted EBITDA

Adjusted EBITDA is defined as earnings before interest (including amortization of debt costs), taxes, depreciation, amortization, loss (gain) on disposition of fixed assets, management fees, equity-based compensation expense, mark-to-market on interest rate cap, loss on debt extinguishment, and special items. Adjusted EBITDA is a key measure used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other companies using similar measures.

Adjusted EBITDA is not a recognized measure of financial performance under GAAP but is used by some investors to determine a company’s ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company’s operating performance in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data, all of which are prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent, and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share

Adjusted net income (loss) and adjusted net income (loss) per share are additional key measures used by management and our board of directors to assess our financial performance. Adjusted net income (loss) and adjusted net income (loss) per share are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.

Adjusted net income (loss) is defined as net income adjusted to exclude loss (gain) on disposition of fixed assets, management fees, equity-based compensation expense, mark-to-market on interest rate cap, loss on debt extinguishment, and special items. Adjusted net income (loss) per share is defined as adjusted net income (loss) divided by the weighted average number of common shares outstanding.

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Factors Affecting the Comparability of our Results of Operations

Our reported results have been affected by, among other events, the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

Impact of COVID-19

We are closely monitoring the continuing impact of COVID-19 on all aspects of our business and in all of our locations. As of April 3, 2021, we operated 940 locations in 38 states and all locations are currently open. During the 13- and 26- weeks ended April 3, 2021, we maintained operations as an ‘essential’ business, as defined by various federal, state, and local authorities, by providing essential products and services that maintain the safety and sanitization of homes and businesses. From time to time, certain of our locations may be temporarily closed or restricted to curbside service only. Closures and restrictions did not have a material impact on our performance during the 13- and 26- weeks ended April 3, 2021. We remain committed to supporting federal, state, and local mandates to prevent the spread of COVID-19 while we operate our business and to do our part in protecting public health.  

We help keep our communities safe from serious public health risks by providing essential products and services. Water that is not properly maintained can serve as a breeding ground for potentially fatal bacteria and viruses.

As a business, the health and safety of our consumers, communities, and associates remain our highest priority, and we continue to take all precautions recommended by the Centers for Disease Control and Prevention to ensure their safety and well-being. We have proactively implemented extensive measures in response to COVID-19 throughout our business operations, including:

 

Required team members who are experiencing symptoms or have been in close contact with someone who has symptoms or has been exposed to the coronavirus to stay home;

 

Provided additional employee benefits related to COVID-19, including covering the cost of the vaccine for our employees;

 

Distributed personal protective equipment and implemented new monitoring protocols, including the installation of contactless temperature scanners in our corporate offices and distribution centers;

 

Enhanced facility cleaning including routine sanitization of high touch surfaces;

 

Implemented social distancing guidelines and capacity restrictions in our locations and reduced operating hours;

 

Encouraged contactless payments and introduced curbside pickup and contact-free service calls;

 

Incurred front line recognition pay for associates in our locations, distribution centers, and service technicians during the third and fourth quarters of 2020;

 

Executed remote workforce plan for associates in our corporate offices; and

 

Enacted mandatory travel restrictions.

We have also closely coordinated with our vendor partners to minimize the impact of supply disruptions and maintain the flow of essential products to meet the elevated demand from consumers in the current environment. The full impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact, and any changes in consumer behaviors. It is not possible to predict the likelihood, timing, or severity of the aforementioned direct and indirect impacts of COVID-19 on our business. Restrictions on the operation of our locations and distribution facilities could have a material impact on our sales and earnings. COVID-19 could also lead to significant disruption to our supply chain for products we sell and could have a material impact on our sales and earnings.

Business Acquisitions

Our business acquisitions did not have a material impact on our financial position or results of operations. See Note 3 – Business Combinations to the accompanying unaudited condensed consolidated financial statements for information regarding our business acquisitions.

Incremental Public Company Expenses

As a newly public company we incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses. These costs will generally be expensed under SG&A in the condensed consolidated statement of operations.

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Results of Operations

We derived the condensed consolidated statements of operations for the 13- and 26- weeks ended April 3, 2021 and March 28, 2020 from our condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales.

 

(dollars in thousands, except per share amounts)

 

Three Months Ended

 

 

Six Months Ended

 

Statement of operations data:

 

April 3, 2021

 

 

March 28, 2020

 

 

April 3, 2021

 

 

March 28, 2020

 

Sales

 

$

192,441

 

 

$

126,377

 

 

$

337,447

 

 

$

249,355

 

Cost of merchandise and services sold

 

 

120,758

 

 

 

86,464

 

 

 

214,049

 

 

 

168,364

 

Gross profit

 

 

71,683

 

 

 

39,913

 

 

 

123,398

 

 

 

80,991

 

Selling, general and administrative expenses

 

 

70,374

 

 

 

56,048

 

 

 

147,863

 

 

 

115,769

 

Operating income (loss)

 

 

1,309

 

 

 

(16,135

)

 

 

(24,465

)

 

 

(34,778

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8,126

 

 

 

22,709

 

 

 

19,642

 

 

 

45,126

 

Loss on debt extinguishment

 

 

1,888

 

 

 

 

 

 

9,169

 

 

 

 

Other expenses, net

 

 

1,057

 

 

 

187

 

 

 

1,057

 

 

 

324

 

Total other expense

 

 

11,071

 

 

 

22,896

 

 

 

29,868

 

 

 

45,450

 

Loss before taxes

 

 

(9,762

)

 

 

(39,031

)

 

 

(54,333

)

 

 

(80,228

)

Income tax benefit

 

 

(3,310

)

 

 

(9,205

)

 

 

(17,624

)

 

 

(24,215

)

Net loss

 

$

(6,452

)

 

$

(29,826

)

 

$

(36,709

)

 

$

(56,013

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.03

)

 

$

(0.19

)

 

$

(0.20

)

 

$

(0.36

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

186,810

 

 

 

156,500

 

 

 

181,900

 

 

 

156,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of Sales(1)

 

(%)

 

 

(%)

 

 

(%)

 

 

(%)

 

Sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of merchandise and services sold

 

 

62.8

 

 

 

68.4

 

 

 

63.4

 

 

 

67.5

 

Gross margin

 

 

37.2

 

 

 

31.6

 

 

 

36.6

 

 

 

32.5

 

Selling, general and administrative expenses

 

 

36.6

 

 

 

44.4

 

 

 

43.8

 

 

 

46.4

 

Operating income (loss)

 

 

0.7

 

 

 

(12.8

)

 

 

(7.3

)

 

 

(13.9

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

4.2

 

 

 

18.0

 

 

 

5.8

 

 

 

18.1

 

Loss on debt extinguishment

 

 

1.0

 

 

 

-

 

 

 

2.7

 

 

 

-

 

Other expenses, net

 

 

0.5

 

 

 

0.1

 

 

 

0.3

 

 

 

0.1

 

Total other expense

 

 

5.8

 

 

 

18.1

 

 

 

8.9

 

 

 

18.2

 

Loss before taxes

 

 

(5.1

)

 

 

(30.9

)

 

 

(16.1

)

 

 

(32.2

)

Income tax benefit

 

 

(1.7

)

 

 

(7.3

)

 

 

(5.2

)

 

 

(9.7

)

Net loss

 

 

(3.4

)

 

 

(23.6

)

 

 

(10.9

)

 

 

(22.5

)

Other financial and operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of new and acquired locations

 

 

4

 

 

 

 

 

 

4

 

 

 

6

 

Number of locations open at end of period

 

 

940

 

 

 

932

 

 

 

940

 

 

 

932

 

Comparable sales growth(2)

 

 

51.3

%

 

 

13.7

%

 

 

33.7

%

 

 

8.4

%

Adjusted EBITDA(3)

 

$

9,528

 

 

$

(8,081

)

 

$

9,285

 

 

$

(17,085

)

Adjusted EBITDA as a percentage of sales(3)

 

 

5.0

%

 

 

(6.4

)%

 

 

2.8

%

 

 

(6.9

)%

Adjusted net loss(3)

 

$

(2,781

)

 

$

(28,756

)

 

$

(13,400

)

 

$

(53,070

)

Adjusted net loss per share

 

$

(0.01

)

 

$

(0.18

)

 

$

(0.07

)

 

$

(0.34

)

 

(1)

Components may not add to totals due to rounding.

(2)

See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.”

(3)

The tables below provide a reconciliation from our net loss to Adjusted EBITDA and net loss to adjusted net loss for the 13- and 26- weeks ended April 3, 2021 and March 28, 2020 (in thousands).

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Three Months Ended

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

 

April 3, 2021

 

 

March 28, 2020

 

Net loss

 

$

(6,452

)

 

$

(29,826

)

 

$

(36,709

)

 

$

(56,013

)

Interest expense

 

 

8,126

 

 

 

22,709

 

 

 

19,642

 

 

 

45,126

 

Income tax benefit

 

 

(3,310

)

 

 

(9,205

)

 

 

(17,624

)

 

 

(24,215

)

Depreciation and amortization expenses(a)

 

 

6,263

 

 

 

6,812

 

 

 

12,858

 

 

 

14,088

 

Loss (gain) on disposition of fixed assets(b)

 

 

5

 

 

 

27

 

 

 

(1,753

)

 

 

470

 

Management fee(c)

 

 

 

 

 

617

 

 

 

382

 

 

 

1,940

 

Equity-based compensation expense(d)

 

 

1,951

 

 

 

598

 

 

 

14,111

 

 

 

1,195

 

Mark-to-market on interest rate cap(e)

 

 

 

 

 

 

 

 

 

 

 

22

 

Loss on debt extinguishment(f)

 

 

1,888

 

 

 

 

 

 

9,169

 

 

 

 

Costs related to equity offerings(g)

 

 

1,057

 

 

 

 

 

 

9,209

 

 

 

 

Other(h)

 

 

 

 

 

187

 

 

 

 

 

 

302

 

Adjusted EBITDA

 

$

9,528

 

 

$

(8,081

)

 

$

9,285

 

 

$

(17,085

)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

 

April 3, 2021

 

 

March 28, 2020

 

Net loss

 

$

(6,452

)

 

$

(29,826

)

 

$

(36,709

)

 

$

(56,013

)

Loss (gain) on disposition of fixed assets(b)

 

 

5

 

 

 

27

 

 

 

(1,753

)

 

 

470

 

Management fee(c)

 

 

 

 

 

617

 

 

 

382

 

 

 

1,940

 

Equity-based compensation expense(d)

 

 

1,951

 

 

 

598

 

 

 

14,111

 

 

 

1,195

 

Mark-to-market on interest rate cap(e)

 

 

 

 

 

 

 

 

 

 

 

22

 

Loss on debt extinguishment(f)

 

 

1,888

 

 

 

 

 

 

9,169

 

 

 

 

Costs related to equity offerings(g)

 

 

1,057

 

 

 

 

 

 

9,209

 

 

 

 

Other(h)

 

 

 

 

 

187

 

 

 

 

 

 

302

 

Tax effects of these adjustments(i)

 

 

(1,230

)

 

 

(359

)

 

 

(7,809

)

 

 

(986

)

Adjusted net loss

 

$

(2,781

)

 

$

(28,756

)

 

$

(13,400

)

 

$

(53,070

)

______________

(a)

Includes depreciation related to our distribution centers and stores, which is included within the cost of merchandise and services sold line item in our condensed consolidated statements of operations.

(b)

Consists of loss (gain) loss on disposition of assets associated with store closures or the sale of property and equipment.

(c)

Represents amounts paid or accrued in connection with our management services agreement. The management services agreement terminated upon the completion of our initial public offering during the six months ended April 3, 2021.

(d)

Represents non-cash charges related to equity-based compensation.

(e)

Includes non-cash charges related to the change in fair value of our interest rate cap agreements, which expired in March 2021.

(f)

Represents non-cash expense due to the write-off of deferred financing costs related to our Term Loan modification during the three months ended April 3, 2021 and the repayment of our Senior Unsecured Notes during the six months ended April 3, 2021.

(g)

Includes one-time payments of contractual amounts incurred in connection with our IPO that was completed in November 2020 and our follow-on equity offering in February 2021.

(h)

Other non-recurring, non-cash or discrete items as determined by management, such as transaction related costs, personnel-related costs, legal expenses, strategic project costs, and miscellaneous costs.

(i)

Represents the tax effect of the total adjustments based on our actual statutory tax rate for fiscal year 2020 and our estimated statutory tax rate for fiscal year 2021.


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Selected Financial Information

Sales

Sales increased to $192.4 million for the three months ended April 3, 2021 from $126.4 million in the prior period, an increase of $66.0 million or 52.3%. This increase was the result of a comparable sales increase of 51.3% and non-comparable sales growth primarily attributable to acquisitions. The comparable sales increase of $64.8 million for the three months ended April 3, 2021 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas.

Sales increased to $337.4 million for the six months ended April 3, 2021 from $249.4 million in the prior year period, an increase of $88.0 million or 35.3%. This increase was the result of a comparable sales increase of 33.7% and non-comparable sales growth primarily attributable to acquisitions. The comparable sales increase of $84.1 million for the six months ended April 3, 2021 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas.

We believe that COVID-19 has accelerated secular trends in consumer behavior and has favorably impacted our sales. While the duration and effects of the COVID-19 pandemic are uncertain, we anticipate that the changes in consumer behavior will continue for the foreseeable future.

Gross Profit and Gross Margin

Gross profit increased to $71.7 million for the three months ended April 3, 2021 from $39.9 million in the prior period, an increase of $31.8 million or 79.6%. Gross margin increased to 37.2% for the three months ended April 3, 2021 compared to 31.6% in the prior year period, an increase of 567 basis points.

Gross profit increased to $123.4 million for the six months ended April 3, 2021 from $81.0 million in the prior year period, an increase of $42.4 million or 52.4%. Gross margin increased to 36.6% for the six months ended April 3, 2021 compared to 32.5% in the prior year period, an increase of 409 basis points. These increases in gross profit were primarily driven by the increase in comparable sales.

Selling, General and Administrative Expenses

SG&A increased to $70.4 million for the three months ended April 3, 2021 from $56.0 million in the prior period, an increase of $14.4 million or 25.6%. As a percentage of sales, SG&A decreased to 36.6% for the three months ended April 3, 2021 compared to 44.4% in the prior period, a decrease of 779 basis points. The increase in SG&A for the three months ended April 3, 2021, consisted primarily of $12.1 million attributed to the increase in overall sales and our continued investments to support Company growth and $2.0 million related to noncash equity-based compensation charges.

SG&A increased to $147.9 million for the six months ended April 3, 2021 from $115.8 million in the prior year period, an increase of $32.1 million or 27.7%. As a percentage of sales, SG&A decreased to 43.8% for the six months ended April 3, 2021 compared to 46.4% in the prior year period, a decrease of 261 basis points. The increase in SG&A for the six months ended April 3, 2021, consisted primarily of $14.8 million attributed to the increase in overall sales and our continued investments to support Company growth, $12.9 million related to noncash equity-based compensation charges primarily due to the vesting of performance-based equity units at the time of the IPO, and $8.2 million of one-time contractual amounts incurred in connection with the IPO, partially offset by $3.8 million of expenses related to the strategic consolidation of certain locations during the first quarter of fiscal year 2020.

Total Other Expense

Total other expense decreased to $11.1 million for the three months ended April 3, 2021 from $22.9 million in the prior period, a decrease of $11.8 million. Total other expense decreased to $29.9 million for the six months ended April 3, 2021 from $45.5 million in the prior year period, a decrease of $15.6 million. These decreases were primarily driven by lower interest expense on our floating rate debt of $14.6 million and $25.5 million for the three and six months ended April 3, 2021, respectively, partially offset by a loss on debt extinguishment related to the repayment of our Senior Unsecured Notes and Term Loan of $1.9 million and $9.2 million for the three and six months ended April 3, 2021, respectively.

Income Taxes

The income tax benefit decreased to $3.3 million for the three months ended April 3, 2021 from $9.2 million compared to the prior period, a decrease of $5.9 million. The income tax benefit decreased to $17.6 million for the six months ended April 3, 2021 from $24.2 million compared to the prior year period, a decrease of $6.6 million. These decreases primarily relate to a lower loss before taxes in each of the current year periods.

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The effective income tax rate was 31.8% for the six months ended April 3, 2021 and includes the reversal of a valuation allowance for our interest limitation carryforward as a result of our IPO and subsequent debt paydown. The effective income tax rate was 30.7% for the six months ended March 28, 2020 and includes a decrease in the valuation allowance for our interest limitation carryforward due to favorable provisions of the CARES Act.

Net Loss and Net Loss per Share

Net loss improved to a loss of $6.5 million for the three months ended April 3, 2021 from a loss of $29.8 million in the prior period, an increase of $23.3 million or 78.4%. Net loss per share improved to a loss of $0.03 per share for the three months ended April 3, 2021 from a loss of $0.19 per share in the prior period.

Net loss improved to a loss of $36.7 million for the six months ended April 3, 2021 from a loss of $56.0 million in the prior year period, an increase of $19.3 million or 34.5%. Net loss per share improved to a loss of $0.20 per share for the six months ended April 3, 2021 from a loss of $0.36 per share in the prior year period.

Adjusted EBITDA

Adjusted EBITDA improved to $9.5 million for the three months ended April 3, 2021 compared to an Adjusted EBITDA loss of $8.1 million in the prior year period, an increase of $17.6 million. Adjusted EBITDA improved to $9.3 million for the six months ended April 3, 2021 compared to an Adjusted EBITDA loss of $17.1 million in the prior year period, an increase of $26.4 million. These improvements are due primarily to our increase in comparable sales and an improvement in gross margin.

Adjusted Net Loss and Adjusted Net loss per Share

Adjusted net loss improved to a loss of $2.8 million for the three months ended April 3, 2021 from an adjusted net loss of $28.8 million in the prior year period.  Adjusted net loss per share improved to a loss of $0.01 for the three months ended April 3, 2021 from an adjusted net loss per share of $0.18 in the prior year period.

Adjusted net loss improved to a loss of $13.4 million for the six months ended April 3, 2021 from an adjusted net loss of $53.1 million in the prior year period.  Adjusted net loss per share improved to a loss of $0.07 for the six months ended April 3, 2021 from an adjusted net loss per share of $0.34 in the prior year period.

Seasonality and Quarterly Fluctuations

Our business is highly seasonal. In general, sales and earnings are highest during our fiscal year third and fourth quarters, which include April through September and represent the peak months of swimming pool use. In fiscal year 2020, we generated 77% of our sales and 109% of our Adjusted EBITDA in the third and fourth quarters of our fiscal year. Sales are substantially lower during our fiscal first and second quarters. We have a long track record of investing in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to new locations and other growth initiatives. While these investments drive performance during the primary selling season in our third and fourth fiscal quarters, they have a negative impact during our first and second fiscal quarters.

We experience a build-up of inventory and accounts payable during the fiscal first and second quarters of the year in anticipation of the peak swimming pool supply selling season. We negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March and we pay for merchandise in April through July. As a result of lower sales volumes during our fiscal first and second quarters, we reach peak borrowing during our fiscal second quarter.

The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other non-discretionary products, purchases of discretionary products, and can drive increased activity around installation and repair services we offer. Unseasonably cool weather or significant amounts of rainfall during the peak sales season can reduce chemical consumption in pools and spas and decrease consumer purchases of our products and services. In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, therefore, our total sales and timing of our sales.

We generally open new locations before our peak selling season begins and we close locations after our peak selling season ends. We expect that our quarterly results of operations will fluctuate depending on the timing and amount of sales contributed by new locations.

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity are net cash provided by operating activities and availability under our ABL Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements with internally generated cash on hand and borrowings under our ABL Credit Facility.

Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled $90.3 million as of April 3, 2021 and $157.1 million as of October 3, 2020. There were no amounts outstanding under the ABL Credit Facility as of April 3, 2021 and October 3, 2020. On April 12, 2021, we entered into an amendment to the $200.0 million ABL Credit Facility. See Note 7-Long-Term Debt to the notes of the unaudited condensed consolidated financial statements for more detail.

Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs, and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.

Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.

Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and availability under our ABL Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, and debt service over the next 12 months. In the future, we may also allocate capital toward additional strategic acquisitions. If cash provided by operating activities and borrowings under our ABL Credit Facility are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us if we need it or, if available, the terms will be satisfactory to us.

As of April 3, 2021, outstanding standby letters of credit totaled $9.2 million and, after considering borrowing base restrictions, we had $190.8 million of available borrowing capacity under the terms of the ABL Credit Facility. As of April 3, 2021, we were in compliance with the covenants under the ABL Credit Facility and the Term Loan.

Summary of Cash Flows

The following is a summary of our cash flows from operating, investing, and financing activities (in thousands):

 

 

 

Six Months Ended

 

 

 

April 3, 2021

 

 

March 28, 2020

 

Net cash used in operating activities

 

$

(111,465

)

 

$

(106,135

)

Net cash used in investing activities

 

 

(13,126

)

 

 

(18,660

)

Net cash provided by financing activities

 

 

57,847

 

 

 

45,830

 

Net decrease in cash and cash equivalents

 

$

(66,744

)

 

$

(78,965

)

 

Cash Used in Operating Activities

Net cash used in operating activities increased to $111.5 million for the six months ended April 3, 2021 from $106.1 million in the prior year period, an increase of $5.4 million. This increase was primarily driven by changes in working capital related to our sales growth and the build-up of product inventories and related accounts payable in preparation for our peak season.

Cash Used in Investing Activities

Net cash used in investing activities decreased to $13.1 million for the six months ended April 3, 2021 from $18.7 million in the prior year period, a decrease of $5.6 million. This decrease in net cash used in investing activities was primarily driven by a $3.0 million decrease related to the timing of investments in property and equipment purchases and a $2.4 million reduction in proceeds from asset dispositions.

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Cash Provided by Financing Activities

Net cash provided by financing activities increased to $57.8 million for the six months ended April 3, 2021 from $45.8 million in the prior year period, an increase of $12.0 million. This increase in net cash provided by financing activities was primarily related to net proceeds raised during our initial public offering of $458.6 million, partially offset by the increase in net repayments of long term debt and deferred financing costs of $396.6 million and a decrease in borrowings on our revolving commitment of $50.0 million.

Contractual Obligations and Other Commitments

There were no material changes to our contractual obligations outside the ordinary course of our business during the three and six months ended April 3, 2021 except for the $390.0 million repayment of the Senior Unsecured Notes in November 2020. See Note 10 – Commitments and Contingencies to the accompanying unaudited condensed consolidated financial statements for information regarding our commitments.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of April 3, 2021.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no material changes to our critical accounting policies and estimates during the 13- and 26- weeks ended April 3, 2021 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2020 filed with the SEC on December 23, 2020.

Recent Accounting Pronouncements

There have been no material changes to our recent accounting pronouncements as of April 3, 2021 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2020 filed with the SEC on December 23, 2020.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our borrowings, which carry variable interest rates. Our borrowings include our ABL Credit Facility and Term Loan. Our ABL Credit Facility provides for revolving loans of up to $200.0 million, with a sub-commitment for issuance of letters of credit of $25.0 million. Because our borrowings bear interest at a variable rate, we are exposed to market risks relating to changes in interest rates. As of April 3, 2021, we had variable rate debt outstanding of $810.0 million under our Term Loan. No amounts were outstanding under our ABL Credit Facility as of April 3, 2021. In conjunction with our IPO all of our obligations related to the Senior Unsecured Notes have been settled. Based on the outstanding variable rate loan balance for the Term Loan an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest cost of approximately $8.1 million over the next 12 months. From time to time we enter into interest rate cap agreements to manage interest rate risk. Such agreements cap the borrowing rate on variable debt to provide a hedge against the risk of rising rates. As of October 3, 2020, we had two interest rate cap agreements with a total notional amount of $750 million (the “Cap Agreements”) to mitigate the impact of fluctuations in the three-month LIBOR and effectively cap the LIBOR applicable to our variable rate debt at a rate of 3.00%. Fluctuations in the market value of the Cap Agreements are recorded in other expenses, net on our condensed consolidated statements of operations. In March 2021, our Cap Agreements expired.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. We actively manage the impact of inflation, including tariffs, through strong relationships with our diverse supplier base, vendor negotiation, and price and promotion management. We also strategically invest through inventory purchases in order to obtain favorable pricing ahead of any vendor price increases. As a result, we believe we have an ability to substantially mitigate negative impacts of inflation.

Item 4. Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervisions of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of April 3, 2021.

Changes in Internal Control over Financial Reporting

This Quarterly Report on Form 10-Q does not include disclosure of changes in internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.

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PART II—OTHER INFORMATION

We are subject to various litigations, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. As of April 3, 2021, we had established reserves for claims that are probable and estimable and such reserves were not significant. While we cannot feasibly predict the outcome of these matters with certainty, we believe, based on examination of these matters, experience to date and discussions with counsel, that the ultimate liability, individually or in the aggregate, will not have a material adverse effect on our business, financial position, results of operations or cash flows.

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended October 3, 2020, as updated by the risk factors disclosed in our Quarterly Report on Form 10-Q for the period ended January 2, 2021, other than the risk factors presented below.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the contractual lock-up agreements described below expire and other restrictions on resale lapse, the trading price of our common stock could be adversely impacted. As of May 7, 2021, we had 187,918,474 million shares of common stock outstanding. A substantial portion of these shares were subject to a 180-day contractual lock-up with the underwriters in connection with our initial public offering, with such lock-up agreements having expired on April 26, 2021. In addition, as discussed in “Certain Relationships and Related Party Transactions,” in our Annual Report on Form 10-K, pursuant to our registration rights and lock-up agreement, certain of our stockholders are subject to additional lock-up periods, including the following:

 

each stockholder party to our registration rights and lock-up agreement will be prohibited from selling shares for 90 days following any public offering subject to such agreement, subject to limited waivers and exceptions, which created an additional lock-up period as a result of our public offering in February 2021 that expires on May 11, 2021; and

 

any employee, member of management or director as of the time of closing of our initial public offering will be prohibited from selling shares for an additional 540 days, subject to limited waivers and exceptions, with such additional lock-up period expiring on October 18, 2022.

Upon expiration of each of these lock-up periods, all such shares will be eligible for resale in the public market, subject to applicable securities laws, including the Securities Act. The trading price of our common stock could be adversely impacted if any of these certain significant stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

3.1

 

Fifth Amended and Restated Certificate of Incorporation, effective as of November 2, 2020 (filed with the SEC as Exhibit 3.1 to the Company’s Form 8-K filed on November 2, 2020 and incorporated herein by reference).

 

 

 

3.2

 

Amended and Restated Bylaws, effective as of November 2, 2020 (filed with the SEC as Exhibit 3.2 to the Company’s Form 8-K filed November 2, 2020 and incorporated herein by reference).

 

 

 

4.1

 

First Amendment to Registration Rights and Lock-up Agreement between Leslie’s, Inc. and Bubbles Investor Aggregator, L.P. (filed with the SEC as Exhibit 4.5 to the Company’s Form S-1 filed on February 8, 2021 and incorporated herein by reference).

 

 

 

10.1

 

Amendment & Restated Term Loan Credit Agreement, dated as of March 9, 2021, by and among the Company, Leslie’s Poolmart, Inc., the lenders from time to time party thereto and Nomura Corporate Funding Americas, LLC, as administrative agent for the Lenders and as collateral agent for the Secured Parties (filed with the SEC as Exhibit 10.1 to the Company’s Form 8-K filed on March 10, 2021 and incorporated herein by reference).

 

 

 

10.2*

 

Amendment No. 5, dated as of April 12, 2021, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsidiary borrowers from time to time party thereto, Leslie’s, Inc., each lender from time to time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. National Association, as Co-Collateral Agent.

 

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.

 

 

 

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.

 

 

 

32.1+

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2+

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

*

Filed herewith.

#

Indicates a management contract or compensatory plan or arrangement.

+

Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

LESLIE’S, INC.

 

 

 

 

Date: May 10, 2021

 

By:

/s/ Steven M. Weddell

 

 

 

Steven M. Weddell

 

 

 

Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

27